Tuyen Project Finance March 2016

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Mongolia Economic ForumUlaanb aatar, March 31, 2016

Tuyen D. Nguyen, IFC Resident Representat ive, Mongo lia

Project Finance:A Very Simplified

What & Why


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• IFC Strategy in Mongolia: (i) Sustainable Infra and world-class Mining; (ii)

Access to finance via systemic banks, focusing on SMEs; (iii) Diversification

(services, agri) for jobs.

• Excluding OT our cumulative investment in Mongolia is approx. $500m (half in

past 3 years, and increasing mobilization). Diversified portfolio includebanks, windfarm, hospital, dairy, hotels, telco, affordable housing.

• Advisory to strengthen local institutions (governance, professionalization,

sustainability): (i) Corporate Governance (banks and starting with Erdenes

Mongol, the OT SOE JV entity); (ii) Trade & Competitiveness (Inspections and

Doing Business reforms, and upcoming Agri Commercialization); and (iii)

Sustainability (water in mining, banking sector).

IFC IN MONGOLIA Diversified & Growing Investment and Advisory Portfolio


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Petronet LNG

$150,000,000Syndi cated Corporate Loan

Lender

India

June 2007

IFC PROJECT FINANCE EXAMPLES Airport, Power & Energy, Oil, Gas & Mining (well-tested globally)


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WHAT DO THESE HISTORIC GLOBAL PROJECTS HAVE IN COMMON?Completed by Project Financing Solutions

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Eurotunnel: UK France Panama Canal

North Sea Oil Fields (UK) LNG Terminal (Texas)


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WHAT DO THESE MONGOLIAN PROJECTS HAVE IN COMMON?Two World-Class Projects Done with PF… Others in Future?

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Oyu Tolgoi Salkhit Windfarm

CHP5 UB Waste & Clean Water

? ?

http://www.google.mn/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjUp8vpreDLAhVKSiYKHWydDPIQjRwIBw&url=http://www.aseminfoboard.org/events/asem-seminar-renewable-energy&bvm=bv.117868183,d.eWE&psig=AFQjCNHJov4xfJneLgt-FPNC5uRggzJxmg&ust=1459150622231553http://www.google.mn/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjUp8vpreDLAhVKSiYKHWydDPIQjRwIBw&url=http://www.aseminfoboard.org/events/asem-seminar-renewable-energy&bvm=bv.117868183,d.eWE&psig=AFQjCNHJov4xfJneLgt-FPNC5uRggzJxmg&ust=1459150622231553


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• Project finance offers a means for investors, creditors, and other unrelatedparties to come together to share the costs, risks, and benefits of new

investment in an economically efficient and fair manner .

• Project finance helps finance new investment by structuring the financing

around the project's own operating cash flow and assets, without

additional sponsor guarantees. Thus the technique is able to alleviate

investment risk and raise finance at a relatively low cost, to the benefit of

sponsor and investor alike.

• As the emphasis on corporate governance increases, the contractually based

approach of project finance can also help ensure greater transparency.

WHAT: DEFINITION & KEY FEATURES Share Risks and Benefits, Ring-fence Project Risks, and Assure Greater Transparency


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How Common. Project financing is a very well established financing approach,very common both in developed and emerging markets especially for

infrastructure. Project financing is IFC’s core financing product.

Advantages. Especially suited for investments with well defined scope. Also for

investments with multiple Sponsors, where clarity of obligations is important.

Especially attractive for financings in emerging markets, where Sponsors may

need some element of political risk mitigation. Leverage’s potential returns to

equity holders.

Disadvantages. Lengthy process of choosing banks and advisors, complex

multiparty negotiations and legal documentation add to cost and time.

WHAT: DEFINITION & KEY FEATURES Well-tested Globally Over Many Decades…. But Complex & Very Technical


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Oil and gas field production, •

Downstream oil and gas (incl. LNG and

refining) • Petrochemicals • Pipelines •

Power generation and transmission •

Petrochemicals • Pipelines • Power

generation and transmission • Mineralsmining • Minerals processing • Road,

bridges and tunnels • Railways and

metros • Road, bridges and tunnels •

Railways and metros • Airports and docks• Water supply and desalination • Waste

treatment • Telecommunications •

Property (incl. hotels) • Hospitals

WHAT: APPLICATION FOR INFRASTRUCTURE PROJECTS All Types, Well-tested, & Continuing to Broaden in Application

A Very Brief History:

• 19th Century – infrastructure(e.g. canals and railways)

• 1970’s – Oil, gas and mineralsindustries

• 1980’s – US IPPs andEurotunnel

• 1990’s – Privatization, “globalutilities” and PFI

• 2000’s – Utilities andInfrastructure (Broadening)

A Very Tested Solution!


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WHAT: BREAKDOWN BY REGION & SECTORS Asia, Power, Oil & Gas, Transport are top PF Recipients

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Source: Thomson Reuters


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WHY: FDI CRITICAL TO MONGOLIA GROWTH (PF IS A SOLUTION) No Country Can Be An “Island”: Partners & Stable Investment Climate Vital

FDI has dropped sharply…

Source: Bank of Mongolia (BoM)

FDI is not just capital… but also expertise,technology, management

…Causing growth to fall


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WHY: MONGOLIA GOVERNMENT DEBT AT “CEILING” Project Financing (via PPPs) to Raise Needed Capital (and Expertise) from Private Sector

Strong LT outlook but near-termvulnerabilities in debt service

FX reserves & new financingcritical to service debt in 2017-18

Government alone will not have the capital (or expertise)to develop, fund, implement & operate efficient projects


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WHY: GLOBAL & MONGOLIA INFRASTRUCTURE GAP IS IMMENSEWithout Infrastructure, Growth Is Limited (Companies, Govt, Households)

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Mongolia will need $20-30 billion investments in newinfrastructure (next 5-10 years) for LT sustained growth

http://www.google.mn/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi7i5KXuuDLAhXEOyYKHQFdAgoQjRwIBw&url=http://www.odi.org/events/4257-infrastructure-development-public-finance-management-pfm&bvm=bv.117868183,d.eWE&psig=AFQjCNGSCZGZ_Bg25A2Nhg1fsG9evuwlzg&ust=1459153925966752


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WHY: A FOOTBALL (SOCCER) TEAM NEEDS MANY POSITIONSEach Player Contributes Different Skills For The Team’s Shared Goal

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WHY: A PROJECT “TEAM” ALSO NEEDS DIFFERENT PARTNERS Each Partner Shares Different Risks & Benefits And Project Is Aligned and Completed

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Borrower (SPV)

Freedom. To borrow more, for as long as

possible, to spend more, to report less, to invest,

to grow, to manage the Project independently

and to distribute to shareholders

Cost. Pay lower spread, fees, expenses

Risk. To share risks with lenders, to give as little

security or support for the loans as can be

negotiated, to be able to walk away with the least

damage if everything goes wrong.

Lender(s)

• Control. Limit other borrowings, limit non projectspending, limit distributions, report more, give

lenders more rights

• Cost. Pay higher spread, higher fees, more

expenses !

• Risk. To share risks with the Shareholders, get all

possible security, as much Sponsor support for as

long as possible, make it as hard as possible to

walk away.

The Shareholder(s)

The Shareholders want the same as the Borrower. Shareholder interests and goals in negotiating the PF

are fully aligned with the Borrowers interests and goals.

Government (In PPP): To get best value for money for (Infra) services invested & delivered (to Society)

WHY: WHAT DO THE PARTIES WANTEach Partner Shares Different Risks & Benefits And Project Is Aligned and Completed


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WHY: WELL-TESTED & OBJECTIVE DISCIPLINEProfessional, Legal and Market Discipline

Tried and Tested. While PF is complex and while there are project specific features in all deals, PF is built

upon firmly established market and legal practice.

Independence and Rigor. PF is a multi party financing process which relies on independent objective advice

and rigorous due diligence which all parties can take comfort from. The PF documentation creates legally

binding, consequential obligations on all parties to disclose material information and make representations

other parties can rely on. The advisors in the process have both legal obligations and business and moral

interests to act with integrity and professionalism to protect their reputation and standing.

Market Pricing. Price setting is by a sealed bid market process involving multiple lenders with full access to

all relevant information who are legally obligated to act independently. This auction process establishes a

full and fair clearing price reflecting the true market adjusted risk/reward of the financing.

Alignment of Interests. Lenders share common interests which they, with the assistance of their legal

counsel, will negotiate hard to protect. The borrower, with the assistance of the Sponsor and their team of

legal advisors will negotiate just as hard to protect their competing interests. What’s good for the borrower in

a PF is also good for ALL Shareholders.


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(A LITTLE OF “HOW”): THE PROCESS Project Phases & Risks Assessment (Due Diligence)

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Lender Due DiligenceRisk identification, assessment,

allocation and sharing

• Environment • Technical • Commercial • Markets

• Financial • Insurance • Legal

Project Phases1. Development > Financial Close

2. Construction > Project Completion3. Operation > Termination (Transfer)

Project Assets1. Cash2. People

3. Site (Land)4. Plant, Building, Inventory5. Agreements (Concessions, Licenses)

OT historic PF closing (Dec2015) result of many years

of detailed working togetherwith many partners


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Thank You

Documents

Tuyen Project Finance March 2016